Determinant Effects of Country Risk Factors on Foreign Direct Investments

44570

Foreign investors consider the legal, political and economic risks of the countries while they are taking investment decisions. Because, they cannot leave the country immediately if a crisis outbreaks or another unfavorable development affecting the investment conditions of the country occurs. Therefore, foreign investors undertake the potential risks of a country when they invest in that country. For that reason, the risk level of a country and foreign direct investment (FDI) inflow to that country are expected to have a negative relationship. In this study, this expectation is analyzed empirically and it is investigated that whether the country risk factors have a negative effect on FDI inflows or not. Also, it is examined that how the effects of risk factors on FDI inflow vary according to the countries’ level of development. Panel regression analyses were implemented by grouping countries according to their development levels. Results show that country risk factors, represented by credit ratings and risk premium, have a significant positive effect on foreign direct investment for developing countries. For developed countries this effect is insignificant. Therefore, for developing countries, an important component of foreign direct investment policy should be ensuring macroeconomic and political stability.

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Foreign Direct Investment , Developing Countries , Panel Data , Credit Ratings , Risk Premium

Ege Academic Review (EAR)

190

Ege Academic Review (EAR)